Using LLC to buy notes and investment properties

[Tim Dobbs]

Good evening,

I'm a new (aspiring) investor and have gotten very interested in notes. I've done a lot of studying on the subject which has mostly taught me that there's a lot more to learn and Due Diligence is critical. I plan to start out small with lower value performing notes, probably seconds, in order to get some experience. One of the first questions that comes to mind is if I should use an LLC rather than buy personally. It seems like while there would be some extra cost involved that it would be worthwhile in the long run. I presumably would also buy and hold rental properties in the same LLC. I'm in Texas.

Any guidance would be welcomed.  

Thanks,  

[Christopher Winkler]

@Tim Dobbs Welcome to the painfully rewarding world of notes! We have found its best to NOT put them in your name if you can help it. @Tiger M. points out that you are exposing yourself by having your name on the deed or assignment of mortgage. In Texas an LLC is a few hundred dollars and well worth it. We have a series LLC which allows us to create multiple series, each a stand-alone entity, for each joint venture we do with our investors. This keeps things all seperated so you are not putting all your eggs in one basket.

Our first deals were done in our investors name or their entity, and its a royal pain when you work them out to get them to sign documents and such, and we found by having the retirement account as a member of the Series LLC allows us to do all the workouts, and not delay foreclosures and other actions that require their signature.

We also have found to stay away from 1st liens unless the home value is $50,000 or higher, unless you get them for 5-10 cents on the dollar because if you have to foreclose, and rehab, you make little to no money. With those higher values, you also have to pay more, 60-65 cents on the dollar is standard, and the plethora of new new investors the gurus are cranking out have cause the prices to rise, and availability to shrink. 

Now when we buy a 1st lien, we plan to rehab it if we have to foreclose, as you really can't sell it for more than you pay to a wholesaler if you do not. We just had our first small loss on a Houston note that I'll put in a case study shortly due to the extremely poor condition of the house after we got inside, its location, size, and neighborhood. All of these factors are very important, just like buying a rehab, location, condition, neighborhood, etc.

Due diligence is so critical, there are so many ways that you can get nickled and dimed to death; property taxes, city fines, county fines, HOA fees, past due water or electrical bills that stay with the house and not the former owners. Then if you have to foreclose, there is cleanout of all their crap, lawn work, roof, and a number of other issues. If you don't have the money for that, you are not going to make any profit and can lose money. You also have to have a good realtor who will give you an idea of the condition before you buy it, if you dont' have eyes on it, it could be a complete loss when you find out no one wants it, even for $1,000.

And 2nds are a whole seperate world which requires completely different due diligence. With a 1st lien, its more about the property, with a 2nd, its more about the person. You have to be able to look at their credit, and if they are in bankruptcy or not. We have seen people attempt to strip the 2nd in Chapter 13 due to no equity, and when they don't make it through, go right to Chapter 7, and try to discharge the debt there. If you are not monitoring them, and don't challenge it, the debt will be discharged if they can show the court there is not sufficient equity to cover it. Then you also have to worry about the 1st lien being paid or not. Sometimes its not showing up on a credit report and if they file foreclosure, and there is not enough equity, your 2nd lien gets stripped. At least you have the note & mortgage, so if you lose one, you can go after them for the other. 

If all this is intimitating, you might want to look at performing loans, great way to dip your toe into the water and get aclimated before diving in head first. We are brokering some nice performing 2nd liens, on nice homes, with 11%+ yields that are perfect for a self-directed retirement account. Please let me know if that is of interest and keep us posted on how you are doing!